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Application of network theory at commercial banks

Source

Abstract

Network theory is widely used in many sciences and has a long tradition in the social sciences as well. The methods widely used in it might also be employed profitably by commercial banks. The article shows how the decision-making process may become biased if the network effects within a corporate client portfolio are disregarded. The authors demonstrate the potential usefulness of network theory in two distinct areas. The first set of applications relates to classical problems in banking business. Taking the network effects in the corporate client portfolio into account allows the fields of customer attrition, customer retention, customer acquisition, diffusion of various banking products, and optimal pricing policy to be addressed. The second set of applications relates to assessment of portfolio stability. If one big corporation fails or recession hits one industry, it may have a severe impact on interlinked companies and on the banking sector. Attention was paid in the article to showing how the application of network theory can create value in the banking industry.

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